Filing for bankruptcy is a complex legal process designed to offer individuals and businesses relief from overwhelming debt. In the United States, Chapter 7 bankruptcy is a common option for individuals seeking a fresh financial start. However, before filing for Iowa Chapter 7 bankruptcy, one must navigate a critical component known as the means test.
This blog explains the means test and how an Iowa bankruptcy attorney can help you navigate the process.
What is Iowa Chapter 7 Bankruptcy?
Chapter 7 bankruptcy, often referred to as “liquidation bankruptcy,” involves the sale of a debtor’s non-exempt assets to pay off creditors. While this may sound daunting, many filers find that exemptions protect most or all of their property. One crucial step in the Chapter 7 process is the means test, a mechanism designed to assess an individual’s eligibility for this form of bankruptcy.
The Means Test Explained
The means test was introduced as part of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) to prevent individuals with higher incomes from filing for Chapter 7 bankruptcy when they could potentially repay their debts through a Chapter 13 repayment plan.
The means test primarily focuses on an individual’s income and expenses over the six months leading up to the bankruptcy filing.
Not Everyone Needs to Take the Means Test
Not everyone needs to pass the Iowa means test. If your income is below the Iowa median for your household size, you are exempt from the best. The median family income for Iowa is:
- 1 earner – $56,453
- 2 people – $75,323
- 3 people – $88,645
- 4 people – $106,775
If your income is lower than these amounts, you do not need to pass the means test and can file for Iowa Chapter 7 bankruptcy.
Means Test Calculations
If your income is higher than this, you will need to complete the means test calculation to determine if you can pay back a portion of your unsecured debts through a Chapter 13 bankruptcy. The test aims to determine whether you have enough disposable income to pay at least 25% of certain debts in the next five years. If you don’t have enough disposable income to pay this amount of those debts, you’ll be eligible to file Chapter 7 bankruptcy.
The means test generally comes down to what types of expenses can be included here. The Bankruptcy Code has detailed and specific rules regarding what expenses can be deducted in the means test analysis.
To calculate your disposable income:
- Calculate your current monthly income. Income will include almost all sources of income including wages, business income, rental properties, dividends, interest, retirement plans, pensions, unemployment, and any money paid by others for your household expenses.
- Create a list of all expenses. These are the debts you are legally required to pay, as well as those that are necessary for your health and welfare. Include your mortgage/lease payments, utilities, credit cards, personal loans, health insurance, etc.
After you have deducted expenses, if there is not enough money left over to pay at least 25% of your unsecured debts over five years, you’re eligible for relief under Chapter 7.
What If You Do Not Pass the Means Test?
If you fail the bankruptcy means test, you are not eligible to file for Chapter 7 bankruptcy. However, you still have options to manage your debt. You can file for Chapter 13 bankruptcy, or explore alternatives to bankruptcy including debt payoff plans or debt settlement.
Navigate the Means Test with an Iowa Bankruptcy Attorney
The means test can be complicated, and attempting to make all the calculations alone can result in an adverse outcome. Working with a qualified Iowa bankruptcy attorney can streamline the process and increase the likelihood of success.
Shane Zisman has years of experience helping individuals considering bankruptcy. Zisman Law can help you get past the financial obstacles, get debt relief, and take your life back. Get in touch today at 641-472-5141 to schedule a free phone consultation.